Tax Planning for Wealth Transfers

The game has changed, and we do expect estate taxes to be repealed next year by the new administration and congress.

Some things are unclear: we may see a phase-out of the federal estate tax over a five or six year period, instead of all at once in 2017.  The effective date could be in January, or perhaps at the end of the year.  We anticipate that federal gift taxes could also be repealed.  We further expect that “step up in basis” will be repealed, replaced by a capital gains tax on inherited property, similar to the Canadian system.  Accordingly, planning is continuing to focus on the income tax ramifications of property transfers, but as the prior post on this blog will show, capital gains rates are considerably more palatable than the 40% maximum estate tax bracket.  For New Yorkers and others, it remains to be seen if the abrogation of federal estate taxes will translate to the state level.

We are perfectly aware that what can be repealed, can be reinstated in four or eight years.  Accordingly, planners are focusing on taking action for wealthy clients after repeal to place property outside of the reach of the IRS.  Increasingly, this involves using other state laws/jurisdictions for family trusts which are perpetual or tantamount thereto-instead of relying on the NY law which greatly limits their permissible duration.

With local counsel, we have worked in Delaware, South Dakota and Nevada, and the trend to take advantage of the law in these leading trust jurisdictions is compelling.  Besides unlimited duration, such states offer greatly enhanced creditor and divorce protection, and the ability to maintain independent family control over distributions and investment strategy.  NY does not have these features, and does not appear likely to in the foreseeable future.

Pending legislative action, we are continuing to build basic multi-generational trust protected inheritances for our families, but deferring any leveraged and tax driven gifting.  If the time comes for us to recommend meeting us to consider changes to existing documents, or Trusts, we will let you know.  Certainly, life insurance held in irrevocable trusts continue to be beneficial for lots of reasons, and should (generally) be left intact.

The Will Doctor will be posting updates regularly as the profession sifts through the new tax environment and our planning response to it.  One thing is clear: the creditor and bloodline protection from sophisticated trusts will remain crucial components of your estate plan.   The coordination of income tax planning to minimize future capital gains is more important than ever, and will require the collaboration of your investment, tax, and legal team members.




Posted in Status of Tax Legislation, WillPlan Blog.

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